Mitsui O.S.K. Lines, soon to be a prized catch for GIFT City, in talks to build tanker at L&T yard

MUMBAI: Mitsui O.S.K. Lines, Ltd (MOL), the Japanese transport giant and the world’s third largest ship owner by fleet size, will likely open a unit in the Gujarat International Finance Tec-City (GIFT City) for leasing and owning ships and has separately opened talks with Larsen & Toubro Ltd (L&T) to build an oil tanker at its Kattupalli yard near Chennai under the ‘Make in India’ program, multiple sources said.

The GIFT City is India's first International Financial Services Centre (IFSC) under the Special Economic Zone Act - a tax-free offshore enclave within India that seeks to onshore India focused business carried out in other parts of the globe.

MOL’s plan is to open a new entity in GIFT City and use it to lease or build vessels in India under the ‘Make in India’ initiative.“MOL will be setting up a unit in IFSC soon,” one of the sources, an industry source briefed on the matter, said. MOL will look at leasing ships to begin with and follow it up by taking a separate license from the International Financial Services Centres Authority (IFSCA) to own and operate ships, potentially including vessel/s made in India, the source said, asking not to be named.

The ships leased by MOL’s planned IFSC GIFT City entity will fly the foreign flag, but if it succeeds in constructing a ship locally, it will be registered under the Indian flag. MOL, according to a second source, has held preliminary talks with a few local yards to build the tanker. But the problem, he said, is nowadays everybody is “full and happy” with government-funded defence orders, leaving only L&T’s Kattupalli yard for MOL to tap. “MOL is in discussion with L&T’s Kattupalli yard; something should happen soon,” the second source, a shipping consultant with knowledge of the talks said. The shipping consultant said that MOL will “look at building a very simple ship” for a start under the Make in India initiative, to avoid the risks associated with constructing complex and technology intensive ships such as liquefied natural gas (LNG) carriers.

“MOL will start with something very simple such as a medium range oil tanker which has a standard design worldwide,” the shipping consultant revealed. A medium range (MR) tanker currently costs about $45-48  million to build from scratch. By picking a simple ship to begin with for ‘Make in India’, MOL hopes to avoid the ‘completion risks’ associated with constructing a sophisticated ship in India.

“Banks are very strict on constructing the ship per the time schedule,” the consultant said.“Because, the vessels MOL built in China, South Korea and Japan are at yards that have experience and track record, so it is not a problem. But, f MOL tries to build an LNG carrier or a liquefied petroleum gas tanker in India, it will be for the first time. So, banks may see a big risk in this, making it difficult for MOL to raise loans for constructing the ship,” the consultant explained. With none of the time, cost and schedule luxuries that state-run yards are typically accustomed to while constructing ships for the Indian Navy and the Coast Guard, MOL reckons that a private yard such as L&T would stick to the construction schedule and within the contract price.

“Come what may, they will complete the ship construction on time. They will not default. Because, to convince MOL’s top brass in Japan to build in India when they have yards in China, South Korea and Japan churning out hundreds of vessels every year, you must have very solid reasons to bring them here and get them to say yes,” the consultant said.

“The Indian unit of MOL is trying to make a case for it, saying ‘yes L&T can do it’. They are also keen to make it work but finally it all comes
down to the price. If a ship is costing $40 million in China and the same costs $50 million in India, it doesn’t make economic sense to build in India,” the consultant said.

“In fact, the price should be the same in India,” he noted, adding that MOL will “evaluate the yard first before finalising the order”. MOL is the world’s third largest fleet owner running 797 ships and the world’s biggest owner of LNG carriers with 97 such tankers. MOL is the world’s third largest fleet owner running 797 ships and the world’s biggest owner of LNG carriers with 97 such tankers. The first source said that MOL considers India a “very important market” with the Company’s President and Chief Executive Officer Takeshi Hashimoto, putting “emphasis” on the country’s growth potential. MOL is already India’s fourth largest fleet owner, running nine ships registered under the Indian flag from the Domestic Tariff Area (DTA) regime.

Sakura Energy Transport Pvt Ltd, the Indian unit of MOL, runs three very large gas carriers, two very large crude carriers, two medium gas carriers and two product tankers since starting operations in April 2021.
MOL’s Indian unit is engaged in owning and chartering tankers such as oil, gas and chemical carriers to entities, including state-run oil refiners
such as Indian Oil Corporation Ltd.MOL’s move to open a unit in IFSC GIFT City to own and operate Indian flag ships would boost the government’s efforts to woo global fleet owners to the tax haven with the aim of augmenting India’s dismal shipping tonnage.

“MOL will be a big, prized catch for IFSC GIFT City,” the shipping consultant mentioned earlier said.

IFSCA is enticing shipping companies to set up ship leasing units in the GIFT City, offering a host of tax incentives and exemptions, such as tax holiday for any ten of the first 15 years, no capital gains during tax holiday, exemption from the Goods and Services Tax, stamp duty exemption for five years and no capital gains on transfer of ships by a IFSC unit enjoying 100 percent tax exemption. Additional exemptions have also been granted on income generated by way of royalty or interest paid on account of leasing of ships.

“Today, the ship leasing framework that we have is in sync with what is available in other jurisdictions,” said K Rajaraman, Chairman, IFSCA. The idea behind IFSC GIFT City was that a lot of Indian companies have left the shores for various reasons such as tax, procedures, policies, lack of finance, especially in the shipping sector. The thought process was to bring them back, Rajaraman said.
“The idea was to create a policy platform which supports a tax regime which supports the thought process of coming back because India is a very large market and being closer to the market actually makes a lot of sense to many people and indeed that has been happening,” he said.

“We have more than 8 ship lessors who have set up businesses in the GIFT City and there are many more who are in the process of applying. Three ships have been financed out of the GIFT City through some of the banks and 3-4 large ships have also been leased out of GIFT City. So, a process has been kick started. I know it’s a very long haul in the sense that this is a very large industry which has been through ups and downs in a very volatile sector,” Rajaraman added.

Source: ET Infra.com